Fair Value

FAIR VALUE ACCOUNTING: UNDERSTANDING THE ISSUES RAISED BY THE CREDIT CRUNCH

Prepared by Stephen G. Ryan Professor of Accounting and Peat Marwick Faculty Fellow Stern School of Business, New York University July 2008

FAIR VALUE ACCOUNTING: UNDERSTANDING THE ISSUES RAISED BY THE CREDIT CRUNCH

prepared by Stephen G. Ryan Professor of Accounting and Peat Marwick Faculty Fellow Stern School of Business, New York University for the Council of Institutional Investors ∗

July 2008

∗

This white paper was commissioned by the Council of Institutional Investors for the purpose of educating its members, policy makers and the general public about the important and timely topic of fair value accounting and its potential impact on investors. The views and opinions expressed in the paper are those of Professor Ryan and do not necessarily represent the views or opinions of the Council members, board of directors or staff. Official policy positions of the Council are determined only after an extensive due process that includes approval by a vote of the Council board and membership.

FAIR VALUE ACCOUNTING: UNDERSTANDING THE ISSUES RAISED BY THE CREDIT CRUNCH

Table of Contents

Executive Summary ............................................................................................................ 1 I. Introduction................................................................................................................. 2 II. Background Information Abstracting from the Credit Crunch................................... 3 A. Fair Value Accounting............................................................................................ 3 B. The Limited Alternative of Amortized Cost Accounting ....................................... 5 C. The Unsatisfying Mixed-Attribute Accounting Model for Financial Instruments . 7 III. FAS 157 .................................................................................................................. 9 A. Definition of...